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Job displacement risk and severance pay

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  • Cozzi, Marco
  • Fella, Giulio

Abstract

This paper studies the matching of workers within the firm when the productivity of workers depends on how well they match with their co-workers. The firm acts as a coordinating device and derives value from this role. It is shown that a worker's contribution to firm value changes over time in a non-trivial way as co-workers are replaced by new workers. The paper derives optimal hiring and replacement policies, including an optimal stopping rule, and characterizes the resulting equilibrium in terms of worker flows, firm output and the distribution of firm values. Simulations of the model reveal a rich pattern of worker turnover dynamics and their connections to the resulting firm values distribution. The paper stresses the role of horizontal differences in worker productivity, which are different from vertical, assortative matching issues. It derives the rent from organizational capital, with worker complementarities playing a key role. We compare the model to match-specific productivity models and explore the essential differences, with the emphasis laid on worker interactions and complementarities.

Suggested Citation

  • Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," LSE Research Online Documents on Economics 86232, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:86232
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    File URL: http://eprints.lse.ac.uk/86232/
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    Cited by:

    1. Francesco Zanetti & Konstantinos Theodoridis, 2018. "State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications," Economics Series Working Papers 856, University of Oxford, Department of Economics.
    2. Barceló, Cristina & Villanueva, Ernesto, 2016. "The response of household wealth to the risk of job loss: Evidence from differences in severance payments," Labour Economics, Elsevier, vol. 39(C), pages 35-54.
    3. Juan J. Dolado & Etienne Lalé & Nawid Siassi, 2021. "From dual to unified employment protection: Transition and steady state," Quantitative Economics, Econometric Society, vol. 12(2), pages 547-585, May.
    4. Sahin Avcioglu & Bilgehan Karabay, 2020. "Labor market regulation under self‐enforcing contracts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1965-2018, December.
    5. Cristina Lafuente, 2018. "Search capital and Unemployment Duration," 2018 Meeting Papers 427, Society for Economic Dynamics.
    6. Etienne Lale, 2019. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 411-435, January.
    7. Jonathan Créchet, 2023. "Risk Sharing in a Dual Labor Market," Working Papers 2307E, University of Ottawa, Department of Economics.
    8. Donald O. Parsons, 2023. "How should job displacement wage losses be insured?," IZA World of Labor, Institute of Labor Economics (IZA), pages 446-446, July.
    9. Parsons, Donald O., 2017. "Voluntary Employer-Provided Severance Pay," IZA Discussion Papers 11067, Institute of Labor Economics (IZA).
    10. Cristina Lafuente, 2017. "Search capital and Unemployment Duration (Preliminary)," Edinburgh School of Economics Discussion Paper Series 283, Edinburgh School of Economics, University of Edinburgh.

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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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